The average American has saved about $95,000 for retirement, whether that's in a 401(k) plan, an individual retirement account (IRA), stocks, exchange-traded funds (ETFs), or other investment vehicles.
That's not necessarily a bad number, on its face, but it depends on how far off retirement is for you. If you're in your 30s, you're doing really well. If you are in your 50s, then you may have some catching up to do.
There are many rules of thumb when it comes to how much you should have saved by when. But an easy one is this: You should have 1 to 3 times your annual salary in your 30s, 3 to 6 times your annual salary in your 40s, 6 to 8 times your annual salary in your 50s, and 8 to 10 times your annual salary in your 60s.
If you are in that $100,000 range right now and would like to boost your savings, here are some ways you can turn that $100,000 into something closer to $1 million.
Make sure you are getting the full company match
First and foremost, you must make sure that you are getting the full company match in your employer-sponsored retirement plan. Not all companies offer a match -- meaning they match all or a portion of what you contribute to the plan annually -- but most do. Find out what your company's payout is and match it.
The average company matches about 4.5% of your annual salary -- with some matching up to 6%. So, if you are contributing anything less than the company match percentage per month, you are leaving free money on the table. Not only that, but that extra money is not compounding.
Let's do some math. If you are 40 years old and make $50,000 per year, and plan to retire at 65, that gives you 25 years until retirement. Let's assume a 3% annual raise. If you contribute 3% of your salary, you are contributing about $56,000 over 25 years. Likewise, the company is matching that 3%, so it's contributing another $56,000.
But if the limit is 4%, you'd be leaving about $20,000 on the table, as a 4% match would net roughly $75,000 over 25 years. This is assuming you would earn a 10% annual return.
Image source: Getty Images.
The difference in your retirement nest egg would also be significant. If your portfolio had an average annual return of 10% for 25 years, and you had $100,000 in your plan, you'd have about $1.48 million saved by age 65 with a 3% contribution. If you made a 4% contribution and match, the total would be about $1.61 million at age 65 -- about $230,000 more.
If you are 50, you'd only have 15 more years until retirement. Assuming the same inputs and $100,000 base for savings, with a 3% contribution, it would amount to about $28,000 after 15 years, with a $28,000 match. And overall, you'd have $536,000 by age 65. With a 4% contribution and match, you have a $38,000 contribution and similar match, with a total of $575,000 by age 65.
Boost your investments if you are playing catch-up
If you are in your 40s and already have at least $100,000, you are in good shape to reach $1 million by the time you retire. Just keep doing what you are doing and get that full company match. If you are 50 or older, however, you will need to step up your savings.
One way would be to boost the amount you contribute to your employer-sponsored plan. While the company may only match up to 4% to 6%, you can contribute up to $30,000 per year at age 50. It is called the catch-up bonus, as those younger than 50 can only contribute up to $22,500 per year.
Now, if you're making $65,000 a year and you contribute $30,000, that's almost 50% of your salary. For most people, that's just not feasible. But say you contributed 10% at age 50, with a $65,000 per year salary. You'd have about $776,000 by age 65, with a 3% annual raise and a 10% annual return. This is from that $100,000 base that has been established as part of this hypothetical. That's not quite a million, but you could boost it up a percentage point each year with your annual raise to creep closer.
Another option would be to increase your investments outside of your plan through a portfolio of stocks and ETFs. With a 15-year time horizon, you could invest in more aggressive ETFs, like one that tracks the technology sector, with the potential to generate higher long-term returns. For example, the Invesco QQQ (QQQ 0.34%), which tracks the Nasdaq 100, has returned about 13.5% on average over the last 15 years, as of April 24.
Reaching the $1 million plateau is far easier the earlier you start investing, as time is the best ally you have. But even if you are playing catch-up, it can be done with a sound strategy.
